The last decade has seen transformational changes to the way in which non-UK investors of UK real estate are exposed to UK taxation. It is therefore worthwhile recapping the key changes which impact active investors in the UK real estate space and consider some of the common errors and issues encountered in practice.
The wholesale change to the tax regime started with the imposition of higher rates of Stamp Duty Land Tax (SDLT) for certain overseas investors. This largely stemmed from significant inward investment into the UK real estate market that was perceived to have created an inequality compared to buyers resident in the UK and, as a result, it was concluded that reform was required to even the stakes.
Annual Tax on Enveloped Dwellings (ATED), alongside ATED Capital Gains Tax (CGT), was introduced in 2013 and imposed an annual charge on companies that hold high value UK residential properties for personal use and introducing a form of CGT on non-resident parties for the first time. The scope of CGT for non-residents was extended in 2015 concerning residential properties irrespective of value. These changes were followed in 2017 extending the scope of IHT to UK residential property held via offshore corporate structures. In 2019 the taxation for non-resident investors in UK property was further widened as gains on all UK immovable property, including land and commercial property, were brought into scope of UK taxation. Specific elections were introduced as part of these measures dealing with collective investment vehicles and enabling qualifying fund managers to make one of two potential elections known as the exemption election and the transparency election. Then most recently in 2020, non-resident landlord companies have moved from the income tax regime to the corporation tax regime in line with UK resident vehicles that hold rental properties. In addition to this, there has been additional SDLT surcharges implemented and changes to the way in which developers previously outside of the scope of UK tax, by virtue of a double tax agreement, have fallen squarely within the UK tax net. Unsurprisingly, there have been teething problems complying with many of these new provisions.
With ATED we still see several situations of non-compliance where properties held via personal use have not registered and paid the ATED charge. Common examples are firstly claiming rental relief when the conditions are not met and secondly a failure to recognise that the initial £2m threshold has dropped to £500,000. So, whilst initial advice may have scoped out a company from the ATED charge, it has subsequently fallen within scope.
With regard to the April 2019 changes and the widening of the scope of CGT, we have seen a few situations where people are confused by which base cost to utilise when disposing of a property. For residential property, the default base cost remains the April 2015 valuation for direct disposals whereas indirect disposals (i.e. disposals of shares in a property rich entity) have a default base cost of April 2019.
Sticking with the April 2019 changes, there have been a few practicalities that have caused issues with regard to the collective investment vehicle elections. This situation has not been helped by COVID, which has worsened the responsiveness of the HMRC unit responsible for dealing with funds making these elections. We have noted several situations where entities that are not transparent for income tax purposes have wrongly assumed they can elect for transparent treatment for gains purposes. Additionally, many have not recognised the need for the filing of partnership returns in respect of gains (or lack thereof) realised by unit holders in a JPUT/GPUT type structure where the transparency election has been made.
From a corporation tax perspective, we have seen a few recurring themes. Firstly, an overall under-appreciation of the additional administration and complexity of the compliance regime. Investors need to map out payment dates versus filing dates and be proactive in altering internal practice to ensure companies can make accurate payments on account and file on time. Furthermore, the fact that non-resident landlords must consider the Corporate Interest Restriction (CIR) regime and how it might apply to them has, in several situations, been considered later than it ought to have been or indeed either not considered or wrongly assessed. The CIR regime is complex and often requires specialist input. KPMG in the Crown Dependencies can assist impacted clients to ensure those challenges are met.
Overall, the tax landscape for overseas investors in UK real estate is more complex than ever. Utilising offshore structures remains attractive from both a tax and non-tax perspective but, in an environment of transparency, it is critical that upfront advice is taken to ensure obligations are met in a timely fashion. There may well be further changes on the horizon impacting the real estate sector, so the need to understand the impact of those changes is fundamental.